THINK IT Services

If 2008 is remembered as the year that a new generation of on-demand services, including Software-as-a-Service (SaaS) and cloud computing, gained widespread acceptance and accelerated adoption, then I think 2009 will be the time when winning channel partners will become more critical to the on-demand service providers.

Until now, SaaS and cloud computing vendors have been focusing on building reliable and scalable service solutions and demonstrating the viability of their on-demand alternatives to customers.

Now, that they have generally achieved this objective, their next challenge is to build an effective indirect go-to-market strategy and set of strong channel relationships, so they can rapidly and profitably extend their market reach and satisfy the needs of specific market segments.

The need to build a successful channel strategy has become even more essential as a result of the current economic crisis which is placing greater financial constraints on many on-demand vendors’ direct sales capabilities and making customers even more hesitant to do business with new suppliers. Instead, companies will try to reduce the number of vendors they rely upon and will prefer to turn to their existing suppliers, including their local resellers.

This means SaaS and cloud computing vendors will need to align themselves with established resellers and other companies who have access to customers, especially IT/business decision-makers.

Until recently, many SaaS and cloud computing vendors confused third-party ecosystems with effective channel programs. While encouraging third-party developers to design their applications to interoperate with SaaS solutions via application protocol interfaces (APIs) and web services can also enable them to resell the SaaS solutions, it doesn’t satisfy all of customers’ requirements or all of the business-level concerns of potential partners, such as revenue/profit sharing, joint marketing, etc.

Some SaaS vendors are already making enroutes into various third-party channels. Intacct has built a successful channel program, as has Intuit’s QuickBase unit. NetSuite has also been pushing vertical market approach that is highly reliant on channel partners for success.

It is for these reasons I believe developing a successful channel marketing program and creating successful channel relationships will be a key priority for most SaaS vendors in 2009.

It continues to amaze me that there are software industry executives who are still living in denial about the rapidly expanding Software-as-a-Service (SaaS) movement.

The latest example is Lawson Software’s CEO, Harry Debes, who was recently quoted in a ZDnet interview as saying the SaaS market will collapse in the next two years.

This interview generated plenty of response and numerous messages in my inbox yesterday. I particularly liked the blog entry of Daniel Druker, SVP Marketing and Business Development at Intacct.

Debes’ interview follows a series of other recent commentaries suggesting that on-demand SaaS solutions and a widening array of cloud computing services aren’t a viable alternative to traditional, on-premise software applications and computing systems.

The nasayers are all entitled to their opinions, but Debes’ views are particularly disheartening.

He starts by discounting SaaS as just “something I’ve lived through three times in my career now. The first time, it was called “service bureaus”. The second time, it was “application service providers”, and now it’s called SaaS.”

While he’s right that SaaS is an extension of a longstanding idea, he fails to recognize that today’s technologies, starting with broadband networking, make SaaS more economically viable than its previous iterations; or how the dramatically different economic, competitive and even ecological climate makes leveraging software services even more necessary than ever before. But most importantly, Debes refuses to see how the SaaS movement is being fuelled by genuine customer demand and is experiencing accelerated growth because of widespread customer satisfaction with the business benefits of SaaS.

Debes is honest enough to admit he doesn’t like SaaS because it places too much of the burden on the software vendor, “Whereas traditional software is like cocaine–you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one. If it were easier to jump ship, a lot of people would’ve hit the eject button on SAP a long time ago.”

He proves that he hasn’t done his homework when he claims, “The [SaaS] hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.”

The truth is that there are many successful (i.e., profitable) SaaS companies. Salesforce.com is experiencing exponential growth, achieving unprecedented customer satisfaction ratings and reports limited profits only because it is seeking to win market share and could easily generate greater profits if it wanted to accept slower growth.

However, I agree with him on one very important point when he says, “The success of Salesforce.com, in my opinion, has to do with their product being good, not because it’s SaaS.”

But, Debes is also arrogant enough to even admit that he thinks, “People are stupid.”

The world is littered with arrogant business (and political) leaders who refuse to recognize change or listen to the people around them.

In the Boston area alone, I can rattle off the names of many technology companies that have disappeared because their corporate leaders turned a blind eye to the fundamental industry changes that would eventual sweep them away. The most obvious examples are Digital Equipment Corporation and Wang Computer who dismissed the potential impact of the PC.

The lesson is that corporate executives who refuse to pay attention to fundamental market changes will pay a severe price.

In my last blog entry I listed a number of reasons “Why IT Now Sees SaaS As A Savior.” Dan Druker of Intacct, has done a superb job embellishing and expanding upon my ideas on his own blog.

Here’s another important reason why IT is embracing SaaS which I forgot to include in my last blog entry, but may supercede the other reasons I outlined long-term — SaaS enables IT to fulfill its role as an internal service provider.

The idea of the IT department serving as an internal service provider to corporate end-users and strategic business units, as well as customers and partners, was first suggested during the late 1990s when an explosion of external service providers (xSPs) emerged in response to deregulation of the telecommunications industry.

While the idea had plenty of theoretical justification and support, most IT departments were unable to fulfill the promise of this concept because they lacked the service management tools and were constantly distracted by day-to-day ‘firefights’ just trying to keep their systems and software up and running.

SaaS, and the associated evolution of managed services, now permit IT professionals to achieve a more stable software and system environment. With the challenge of simply keeping these assets up and running becoming less of a concern, IT can now focus on more effectively delivering the functionality their end-users, business units, customers and partners need to achieve their corporate objectives.

SaaS service management solutions are also emerging to help IT departments become internal service providers. If these IT departments succeed in becoming true internal service providers, they will also finally become aligned with their end-users, business units, customers and partners.